When you rent, you’re paying the landlord or owner a certain amount each month to live in the property. That’s what renting is!
But when you own a home, you’d expect to stop paying rent. However, if you own a leasehold, you may need to pay ground rent. So, what is it and how can you avoid it?
Table of Contents
Leasehold Ground Rent
Let’s take a look at freeholds and leaseholds to give you a better understanding of ground rent.
With a freehold, you own the house, any other structures, the land it sits on, and the airspace above the property. If you need financing, you’ll pay a mortgage. If you buy it with cash, it’s yours without any debt.
A leasehold is different. Here, you own the house but not the land. If you’re in an apartment, the building isn’t yours either. The freeholder owns the land and buildings.
What Is Ground Rent UK?
With that in mind, what is ground rent? It is a payment made to the freeholder; this is in addition to the usual rent charge.
Why do leaseholders have to pay this? It is essentially a land rental, where they pay for the land that their home is built on or the land and building their apartment or condo is in.
In exchange, they get to live on a property owned by someone else. On top of this, they may also have to pay a service charge.
This is a yearly fee charged by the freeholder (or by a management company on their behalf) which covers things such as garden and landscape work, maintenance of common areas and upkeep of onsite facilities.
Paying ground rent can be a hard pill to swallow for many. Moreover, freeholders may increase ground rent charges regularly and significantly. On average, ground rent is approximately £400 a year, although it can be more in London.
There is no standard formula to calculate the charge, but amounts higher than £500 or £1000 in London are generally seen as excessive. Sadly, there is no protection against this happening.
Problems arise if ground rent is over £250 (or £1000 in London). If the payments are three months behind, the freeholder can repossess the property under Ground 8 of the Housing Act 1988.
Additionally, lenders are hesitant (or refuse outright) to provide loans on properties with such ground rent, making it difficult, or even impossible, to mortgage, remortgage or sell.
When Will Ground Rent Be Abolished?
People are increasingly calling for the end of ground rent, where homeowners essentially rent the land they own and then pay for services on top of that. Freeholders charge a low rate, like a “peppercorn” rate, just enough to maintain the leasehold.
However, some take advantage of their power and overcharge. This was seen in the “Ground Rent Scandal” where contracts for some new developments stipulated that rents would double every 10 years. This left many owners unable to move and unable to afford the high bills.
The Leasehold Reform (Ground Rent) Act 2022 will be a game-changer for leaseholders in the UK. From 30 June 2022, freeholders will not be able to charge more than one peppercorn per year and they cannot charge administration fees for these peppercorn rents.
This applies to leases on brand-new properties, new leases on older flats and the extension of existing leases.
At the time of the announcement of the reforms, the then Housing Secretary, Robert Jenrick, said, “Many people are struggling to make their dream of owning their own home a reality due to the bureaucracy, burden and expense of being a leaseholder.
We are looking to change how we own homes and eradicate some of the worst practices experienced by homeowners.”
The Leasehold Reform (Ground Rent) Act 2022 is expected to benefit 4.5 million leaseholders across the UK. However, current leaseholders will not benefit from the reforms and will still have to pay the charge. If you are a current leaseholder, what can you do?
Avoiding Ground Rent UK
You can’t just stop paying ground rent without the freeholder having the right to pursue action, which includes repossessing your home.
However, there are a few strategies you can try. For example, you and the other leaseholders in your building could join together and purchase the freehold.
If it’s a house, you may be able to buy the freehold on your own. This has both advantages and disadvantages. If your ground rent exceeds £250, you can also sign a deed of variation (cost depending on whether you use a solicitor).
This agreement changes the terms of your lease and could reduce or remove your ground rent; however, the freeholder must agree to this. Another option is to extend your lease.
Having fewer than 80 years left on it, extending your lease will increase the value of your property and make it easier to remortgage or sell. It also lowers your ground rent to a “peppercorn.”
Buying a Freehold
Let’s go back to the beginning. We mentioned that one way to avoid ground rent is to form a group with another flat or house owner and buy the freehold.
Generally, the costs will vary, but the shorter the lease, the higher the cost. Land Registry fees, valuation fees, stamp duty, legal fees and freeholder legal and valuation fees also need to be taken into account. The more people involved (e.g. multiple tenants), the more complex the process is.
If you do purchase the freehold, you will have full ownership rights (either just you or with your fellow tenants). This is your chance to sort out any issues or inefficiencies with the management of the property and lower costs.
It also makes your flat or house more attractive to buyers, if you ever decide to sell. Moreover, when you buy a freehold, you can extend the lease to 999 years and update the terms and agreements.
Although it can be a great move, there are some drawbacks to consider. It can be expensive and managing a building on your own can be complicated.
You need to be aware of fire safety and asbestos for example. You may need to hire a management company to help you with all this or get professional legal advice.
Lastly, tensions and disagreements between co-freeholders are a problem. It can be tricky to chase up late payers if they are your neighbours.
What If You Want to Sell Your Leasehold?
You no longer want to pay the ground and service charges, and you can’t afford your home anymore.
Consequently, you need to relocate to be closer to family, work, or school. Your life has changed and your house is no longer serving its purpose, so it may be time to sell it and move on.
However, this can be easier said than done in a leasehold situation. If your lease is relatively short, it can be very difficult to sell the property.
Lenders don’t feel comfortable offering financing because it doesn’t hold enough value. Generally, mortgages are not approved for properties with leases of less than 75 years, although lenders can adjust this figure.
So, what can you do if you can’t target mortgage buyers, who comprise the majority of the market? You can turn to cash buyers.
Cash House Buyers
Many people may not be aware that cash house buyers are open to buying leaseholds that other lenders shy away from.
If you feel like you’re stuck in an impossible situation, they can provide a way out. Not only that, but they can provide you with a fair and reasonable path to your next chapter in life.
Leaseholds with shorter leases are not always ideal candidates for the market. Extending the lease can cost you tens of thousands of pounds, which may not be a feasible or desirable option.
Likewise, trying to sell a leasehold with a shorter lease (less than 75 to 80 years) is difficult, as mortgage lenders usually don’t back these properties.
Ultimately, your property may not be attractive to the traditional buyer.
This is why you may need to consider a cash buyer, who has different goals and standards when it comes to making investments. Cash buyers don’t need to take the lender’s criteria into account as they have the funds to complete the purchase right away.
How Does the Process Work?
If you’ve looked into ways to sell your leasehold to a mortgage buyer or have attempted and failed, then a cash buyer may be the best option for you. Here are some of the advantages:
They have experience in similar transactions and know what they’re looking for, meaning your leasehold could be a good fit for them. Plus, the timeline is accelerated.
A traditional sale can take up to six months, but with a cash buyer, you can get an initial offer in 24 hours and a formal offer not long after. In the best cases, you can complete the sale within a few weeks.
Costs are also slashed with a cash buyer. You won’t have to worry about solicitors’ fees, search and survey costs, valuations, staging, or marketing and instructing an estate agent. Plus, you’re in control of the process.
It’s important to note that cash buyers typically offer between 75% and 80% of total market value, or potentially up to 85%.
That means if your home is valued at £100,000, you could receive an offer between £75,000 and £80,000 (or up to £85,000 with some buyers). While this might not be as much as you’d get from a traditional sale, it does give you peace of mind and an immediate solution.
Possibly
You’d also need to cover the expenses related to the sales process, such as estate agent and solicitor fees, surveys, and valuations. To make your house attractive to buyers, you’d have to make repairs or upgrades, like rewiring or fixing the roof.
In a leasehold situation, you should consider the length of the remaining lease. If it’s below 80 years, most lenders won’t approve mortgages for the property.
You’d be subject to the marriage value, which means the freeholder would get 50% of the increase in value resulting from a lease extension.
You’d be stuck unless you extend your lease, and this could cost anywhere from thousands to tens of thousands of pounds, depending on the property value, the time left on the lease, the annual ground rent, and the value of improvements made by the leaseholder.
The cost of extending the lease is largely based on the amount of time left. The fewer years, the higher the cost.
As an example, extending the lease on a home with only 16 years left can cost between £77,000 and £99,000. It’s wise to extend the lease sooner or to get out of the situation by selling to a cash buyer.
In general, the cost of adding 90 years to a £200,000 flat lease ranges from £28,000 with 60 years left to just £4,500 with 90 years left.
The cost increases significantly as the remaining lease gets shorter. When it’s 80 years or less, the costs surge exponentially each year. Additionally, lenders are less likely to take on the risk.
Avoiding Ground Rent UK
Buying a leasehold property – either a new build or a new lease on an existing building – can be an effective way of bypassing ground rent. Doing this eliminates the need for paying an extra charge.
Extending your lease is also an option. Although there is a cost involved, it is possible to get rid of ground rent by taking advantage of the Leasehold Reform Act. Additionally, it makes your house more appealing to traditional buyers.
If you want to sell your leasehold, you can find a cash buyer to offer a fair and reasonable price. This is since it can be difficult to sell a leasehold, based on the number of years left on the lease and the amount of ground rent.
Ground rent may not be seen as something bad, as most freeholders charge a low or peppercorn rate. However, due to the demand for more accessible and attainable housing in the UK, the Leasehold Reform Act has done much to reduce the expense for many leaseholders.
Any thoughts about selling your home?
Are you looking to sell your house? We buy houses in any condition. Get in touch if you are thinking of selling.
Property Saviour Price Promise
- The price we’ll offer is the price that you will receive with no hidden deductions.
- Be careful with ‘cash buyers’ who require a valuation needed for a mortgage or bridging loan.
- These valuations or surveys result in delays and price reductions later on.
- We are cash buyers. There are no surveys.
- We always provide proof of funds with every formal offer issued.
We'll Pay £1,500 Towards Your Legal Fees
- No long exclusivity agreement to sign because we are the buyers.
- You are welcome to use your own solicitor.
- If you don’t have one, we can ask our solicitors for recommendations.
- We share our solicitor’s details and issue a Memorandum of Sale.
Sell With Certainty & Speed
- Our approach is transparent and ethical, which is why sellers trust us.
- 100% Discretion guaranteed.
- If you have another buyer, you can put us in a contracts race to see who completes first.
- Complete in 10 days or at a timescale that works for you. You are in control.
